Banks - RHB Invest 2019-01-02: SIBOR Rises As Expected; OVERWEIGHT

Banks - SIBOR Rises As Expected; OVERWEIGHT

Keep OVERWEIGHT.

The 3-month SIBOR has risen further in recent days. Now at 1.89%, it is 12bps higher than mid-Dec 2018’s 1.77%. After the 25bps federal funds rate (FFR) hike on 19 Dec 2018, the market now expects a milder 1-2 more hikes this year. We maintain our view of wider NIMs for Singapore banks.

Rising SIBOR seen to offset adverse effects from slow loan growth.

The 3-month SIBOR rose to the current 1.89% from 3Q18’s average of 1.63% (4Q18 average: 1.73%).

From our sensitivity analysis, we conclude that a 1ppt slowdown in loan growth will be offset by a 10bps rise in SIBOR – based on our estimates, the impact of the Government’s Jul 2018 property cooling measures and unexciting trade loans should be offset by increases in SIBOR over the next few quarters.

PayNowenrolment doubled y-o-y.

According to the Association of Banks in Singapore, the number of registered PayNowaccounts stood at 2.24m as at 2 Dec 2018, double on a y-o-y comparison basis. PayNowCorporate, the funds transfer service for businesses and corporates, has 72,000 registrations.

PayNow, which was launched on 10 Jul 2017, is a peer-to-peer funds transfer service available to the retail customers of nine participating banks. We believe its continued usage will help Singapore banks reduce their expense-to-income ratios over the next few quarters.

UOB is our preferred pick.

UOB is a beneficiary of the rising FFR. Its ROE improved to 11.7% in 3Q18 (FY17: 10.2%). We expect its NIM to widen to 1.96% by FY20 from 3Q18’s 1.81%. We assume a relatively mild 6.5% FY19 loan growth for the bank, with overseas loans a key contributor.

More importantly, management indicated its intention to lower its CET1 CAR, and we see this translating into higher dividends – this could catalyse UOB’s share price higher. Our SGD30.80 Target Price is equivalent to 2019F P/BV of 1.41x, which is sharply lower than 2007’s 2.1x after four years of FFR hikes.

DBS is also attractive.

Amongst Singapore banks, DBS’ earnings will improve the most from every 1bp rise in SIBOR. Whilst the ongoing US-China trade war could slow the bank’s loan growth more than peers, the rise in SIBOR could offset the negatives.

Based on the previous FFR upcycle between mid-2003 and mid-2007, the FFR rose to > 5% from 1%. During that time, DBS’ P/BV rose to as high as 1.9x from 1x. The bank is currently trading at only 1.24x 2019F P/BV, and our target P/BV of 1.54x yields a Target Price of SGD29.80.

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